Building and Maintaining Wealth in 2008

Last year (2007) was a tumultuous year for the stock market. Now that the LED ball in Times-Square has dropped and the confetti has been cleaned up, it's time to briefly recap 2007 and, more importantly, look at how your portfolio should be positioned for 2008.

2007 could easily be referred to as... the Year of the Tums. Our volatile markets experienced three major drops during the year. The first, at the end of February, caused the S&P 500 to fall 4.7% and the emerging markets over 10%. The after celebrating a great first half of the year, the sub-prime fiasco hit in early July and resulted in the S&P 500 losing 7.7% and the emerging markets 17.7%. The year-end rally came early followed by another decline of 7.75% for the S&P 500 and 15.3% for the emerging markets.

In the end, the S&P 500 was up 3.5% and the emerging markets (EEM) were up 33%. Investors, even seasoned investors, have been tempted to throw in the towel and get out of the market. Many have (even institutions have increased their cash holdings). That's why interest rates have fallen so dramatically, with the 10-year Treasury now yielding around 4%.

Let's put this in perspective before you get too depressed! The last time the S&P 500 had a losing year was in 2003. The average annual return on it over the last 5 years has been over 12%. That's well above its long-term average.

The emerging markets (EEM) have done even better. EEM wasn't available for all of 2003, but has been up over 25% each of the last 4 years. To put that in dollar terms, a $100,000 investment in EEM when it came out in 2003 would now be worth around $600,000.

While there is risk associated with investing in the markets, we need to be compensated for taking that risk. Over the last 5 years I would have to say we have. The amount we've earned has far out-weighed the amount we spent on Tums!

Enough about the past. How should you invest in 2008? I can't speak to your situation specifically, but I will tell you about the general themes that I see playing out in 2008 and how you can profit from them. I expect it will be another volatile year so you will have to determine if the potential reward is worth the risk. I believe it is, if you invest correctly.

The U.S. economy is slowing and the housing market/sub-prime crises may continue into 2009. I doubt that we will see returns higher than 10% in the S&P 500. It's more likely that the return could be half of that, but it depends on the Federal Reserve. I expect the Fed to continue to cut interest rates because it must keep our economy from going into a recession, even a mild one.

If you are serious about growing your wealth, you need to invest a portion of your money outside the U.S. markets. The growth in Russia, China, India, and other Asian nations will once again far surpass the growth of our nation, while our inflation is likely to increase. If you don't earn enough, you will actually see your purchasing power decline.

Asian economic growth, combined with even higher mandates for ethanol production in the U.S., will continue to put pressure on commodities like corn, wheat and soybeans. Demand for energy will continue to increase far faster than supply. Oil and coal prices should continue to increase.

This is why I plan to continue focusing on investments outside of the U.S, along with an emphasis on energy, commodities and raw materials. I expect high-dividend paying stocks (such as regional telephone companies) to recover their recent loses. Declining interest rates should drive income-oriented investors back, creating locked-in yields of 8-10% or more.

Investing in foreign companies, energy and raw materials can increase the volatility of a portfolio. You will have to be the judge whether you have the stomach for it. But think about it this way, what are you are trying to accomplish over the next 5 years? The best way to protect your wealth is for it to grow. A drop of 5% or 10% in the short-term pales in comparison to the growth that should be achieved as these major themes play out.

In addition to being a nationally syndicated columnist and Certified Financial Planning Practitioner, Mr. Voudrie provides personal, private money management services to clients nationwide

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